Another victory for tax cuts
When last I wrote on Greece, in 2012, there had just been elections that resulted in a change of power from the Panhellenic Socialist Movement - which had negotiated a government bailout and austerity package responsible for cutting the size of the Greek economy by one quarter - to New Democracy, which advocated a policy of growth through tax cuts.
Subsequent to the election, New Democracy was not immediately able to implement tax cuts, due to the focus on additional austerity measures - that is, budget cuts and tax increases - from the European Union. However, New Democracy was able to ensure that the additional austerity measures consisted of budget cuts, and not tax increases.
Without additional tax increases further dragging down the economy, and with very large government budget cuts, the Greek government posted a "primary budget surplus" - basically a surplus before interest payments - the next year, a year earlier than expected. With this success under its belt, New Democracy was able to negotiate a reduction in the Value Added Tax for hotels and restaurants from 23% to 13%.
The reduction in the VAT was equivalent to a price reduction of 8% across the board for hotels and restaurants. With Greece suddenly a much less expensive place to vacation, tourism surged. This resulted in a turnaround in Greece's economy, which in 2014 is now on track to become one of the fastest growing economies in the eurozone. This is the economy that, four years ago, was thought to be causing the entire eurozone to collapse.
This near miraculous turnaround shows, yet again, that cuts in government spending do not prevent economic growth, and that cuts in tax rates promote that growth. Hopefully policy makers everywhere are paying attention: if you want your economy to grow, cut government spending and cut tax rates.
I also hope the voters in Greece are paying attention to who brought off this miracle, for their own good.
Previous article on 2012 Greek elections:
http://psychohist.livejournal.com/67874.html
Article on 2013 tax cuts:
http://www.euractiv.com/euro-finance/greece-troika-surreal-battle-analysis-529732
Article on 2014 economic growth:
http://www.wsj.com/articles/greek-economy-grows-for-first-time-in-six-years-1415962022?cb=logged0.1922751464881003
Subsequent to the election, New Democracy was not immediately able to implement tax cuts, due to the focus on additional austerity measures - that is, budget cuts and tax increases - from the European Union. However, New Democracy was able to ensure that the additional austerity measures consisted of budget cuts, and not tax increases.
Without additional tax increases further dragging down the economy, and with very large government budget cuts, the Greek government posted a "primary budget surplus" - basically a surplus before interest payments - the next year, a year earlier than expected. With this success under its belt, New Democracy was able to negotiate a reduction in the Value Added Tax for hotels and restaurants from 23% to 13%.
The reduction in the VAT was equivalent to a price reduction of 8% across the board for hotels and restaurants. With Greece suddenly a much less expensive place to vacation, tourism surged. This resulted in a turnaround in Greece's economy, which in 2014 is now on track to become one of the fastest growing economies in the eurozone. This is the economy that, four years ago, was thought to be causing the entire eurozone to collapse.
This near miraculous turnaround shows, yet again, that cuts in government spending do not prevent economic growth, and that cuts in tax rates promote that growth. Hopefully policy makers everywhere are paying attention: if you want your economy to grow, cut government spending and cut tax rates.
I also hope the voters in Greece are paying attention to who brought off this miracle, for their own good.
Previous article on 2012 Greek elections:
http://psychohist.livejournal.com/67874.html
Article on 2013 tax cuts:
http://www.euractiv.com/euro-finance/greece-troika-surreal-battle-analysis-529732
Article on 2014 economic growth:
http://www.wsj.com/articles/greek-economy-grows-for-first-time-in-six-years-1415962022?cb=logged0.1922751464881003